Documentation and Compliance Key in FINRA Sweep Exams of Options Accounts

Broker-dealers need to document their firm’s processes for supervising options trading and demonstrate compliance with them in new FINRA sweep exam on option accounts.

The industry self-regulator is conducting targeted examinations of broker-dealers’ supervision of options trading as part of its ongoing efforts to protect retail investors. FINRA CEO Robert Cook had indicated in July that the sweep would be coming and the regulator followed through shortly thereafter, releasing its Targeted Examination Letter on Option Account Opening, Supervision, and Related Areas in early August.

“Options are tricky and can be difficult to understand for certain investors. Even registered representatives recommending them can struggle understanding and explaining their inherent risks to investors. This sweep exam attempts to determine if firm compliance and supervision programs are adequate to protect investors holding option accounts,” said Margie Webber, Director of Regulatory Compliance for RegEd.

Auditors Seek Specific Information

FINRA and other regulators use targeted exam letters, or sweeps, to focus examinations and pinpoint regulatory responses to emerging issues. The number of firms included in targeted exams and the criteria for inclusion vary.

FINRA’s targeted exam sweep of broker-dealers’ options account activity covers the period from January 2020 to August 2021. In its letter, FINRA asks firms to provide the following information for both self-directed accounts and accounts in which registered representatives recommended options for retail investors.

  1. Written Supervisory Procedures (WSP), compliance manuals, and any other written guidance related to the firm’s processes and procedures regarding the firm’s options account opening and due diligence activities specific to each level of trading permission
  2. Compliance manuals and any other written guidance pertaining to the firm’s supervision of options trading in customer accounts
  3. Methods for surveilling activity of existing options customers
  4. Descriptions of the technology and processes for approving or denying customer options account applications and the supervisory review of those systems
  5. Requirements to open margin accounts or otherwise be approved for margin in connection with options activity as well as descriptions of any technology or process for approving or denying margin accounts
  6. Instances where options limitations (account approval or transactions in options accounts) were not appropriately applied, and any steps taken to date to prevent future breaches of requirements 
  7. Whether the firm reviewed non-options customers and/or existing options customers for promotion or recommendation of a new options account, and if so, how it conducted the review(s) and how often
  8. Means of advertising options accounts and how applications were provided to and submitted by customers
  9. Sample options account applications or similar records used to collect information from customers as part of the firm’s options account approval process 
  10. Sample options-related disclosure materials or other communications provided to customers that explain firm practices and policies

Responding to Auditors’ Requests

“Firms leveraging technology in their compliance and supervision programs are well-positioned to respond to this sweep,” Webber said. “Enterprise compliance solutions give firms visibility throughout the organization and allow for the ownership of procedures and delegation of responsibilities, enabling the compliance professional to more efficiently respond to regulatory examinations such as this options account sweep” she said.

As built-for-purpose tools tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are highly effective as well as cost-efficient. Firms can seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.

RegEd’s compliance management platform includes the following solutions (among others).

  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution, it enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Education and Training Suite – Robust technology and content power firms’ compliance programs. Solutions like CE Program Management and Firm Element Training simplify training and education and improve compliance.
  • Advertising Review – Automates and streamlines compliance reviews to reduce compliance risk and speed time to market. Hallmarked by unmatched flexibility and ease-of-use, it drives the highest levels of efficiency, enabling firms to handle projected volume growth without compromising review quality or turnaround.

Schedule a consultation to learn more about how RegEd’s compliance solutions enable broker-dealers to improve efficiency, effectiveness, and transparency across the enterprise.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

Form CRS Enforcement Begins with $910,092 in Fines

The grace period for firms to furnish investors with Form CRS customer relationship summaries has indeed ended now that the SEC has sanctioned firms for the first time, a little more than a year after the requirement took effect.

The SEC has fined 21 investment advisers and six broker-dealers a total of $910,092. Without admitting or denying the findings, the firms agreed to be censured, cease and desist from violating the charged provisions, and pay civil penalties ranging from $10,000 to $97,523.

“Registration with the SEC as an investment adviser or broker-dealer comes with mandated filing and disclosure obligations,” Gurbir S. Grewal, director of the SEC’s Enforcement Division, stated in a July 26 release announcing why the SEC charged 27 financial firms for Form CRS filing and delivery failures.

“Today’s cases reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”

Form CRS Requirements Protect Retail Investors

Customer relationship summaries are meant to explain the types of services a firm offers as well as the fees and costs it charges for them and to alert investors to any potential conflicts of interest or disciplinary histories on behalf of the firm or its financial professionals. Firms must also disclose any standards of conduct that they are obligated to fulfill.  The relationship summary must be written in plain English and be concise.

Firms have been required to provide customer relationship summaries to retail investors since June 30, 2020. They are also to post the summaries to their websites. Broker-dealers are to complete Form CRS while advisers use Form ADV Part 3.

Regulators shared their expectations for summaries with firms leading up to last year’s effective date and during the first 12 months that they were required. They also offered guidance on completing, filing, and distributing Form CRS.

For example, in April 2020, the SEC issued a risk alert regarding Examinations that Focus on Compliance with Form CRS. It then shared preliminary observations from their initial examinations at a Roundtable on Regulation Best Interest and Form CRS in October 2020. Then it went on to list Form CRS in the examination priorities for 2021 that it released in March.

More recently, at FINRA’s annual conference in May, executives from the industry regulator said that enforcing Form CRS would be a top item on examiners’ agendas this year. They would no longer take a “good faith approach” in which they largely assessed a firm’s implementation progress.

“Form CRS is the first stop for examiners at the beginning of an exam, both to look for compliance with Form CRS instructions and also for getting a high-altitude understanding of the firm for the exam,” said Bill St. Louis, senior vice president and firm group leader for FINRA member firms assigned to the Retail and Capital Markets firm grouping, in a panel discussion about Reg BI and Form CRS observations and expectations.

Form CRS Training Key to Compliance

If any questions as to regulators’ priorities or intents had lingered in the months since FINRA’s conference, the SEC’s first enforcement actions for Form CRS violations have since dispelled those doubts. According to the SEC’s orders, each of the firms charged missed regulatory deadlines for filing or delivering its Form CRS, or posting it to its website, until being twice reminded of the missed deadlines by their regulators — in the case of investment advisers, by the SEC’s Division of Examinations, and in the case of broker-dealers, by FINRA.

“It’s noteworthy that chief compliance officers weren’t named in these enforcement cases since they were reminded at least twice by FINRA and/or the SEC before complying,” said Margie Webber, Director of Regulatory Compliance for RegEd. “It will be interesting to see if state securities regulators will piggyback on the SEC enforcement.”

Regulators’ intent to enforce Form CRS reinforces the need for related education and training for firms, advisers, and brokers, Webber said. “Investor protection is a top regulatory priority for state and federal regulators. It should be a top priority for industry as well.”

As built-for-purpose tools tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are effective and cost-efficient. Firms seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.

RegEd’s compliance management platform includes the following solutions (among others).

  • Education and Training Solution Suite – Advanced learning management technology streamlines the creation of a firm’s annual compliance program, simplifies course enrollment, provides access to timely course materials, and efficiently tracks course completion.
  • Policies and Procedures Management Solution – An enterprise workflow, work-process, and task management solution enables comprehensive, end-to-end administration and oversight of all elements of a firm’s policies and procedures.
  • Conflicts of Interest Solution Suite – Automated end-to-end management of request processes, compliance monitoring, and exception management associated with conflict of interest policies embeds best practices in a firm’s compliance program. 

Schedule a consultation to learn more about how RegEd’s compliance solutions enable securities firms to improve efficiency, effectiveness, and transparency across the enterprise.

For additional ways to strengthen your firm’s compliance program, view our recent webinar on FINRA, SEC, and State Securities Enforcement Trends.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

Broker-dealers Hope for Permanent Remote Inspections as FINRA Ponders Extension

Regulators remain open to extending remote examinations for broker-dealers into 2022 and firms hope the relief will last even longer.

FINRA President Robert Cook recently reiterated the need for exams to remain remote into 2022 during a conference held by the Securities Industry and Financial Markets Association’s (SIFMA), WealthManagement reported. “What I’d like to see happen here, at least where my thinking currently is, is we would extend it into next year, and that we would also step back and look at that rule more holistically, and think about whether it could use some updating to accommodate a thoughtful, risk-based approach to when in-person exams would be necessary,” Cook said, according to WealthManagement.

FINRA Chief Legal officer Bob Colby expressed a similar desire to extend remote exams into 2022 during the regulator’s annual conference in May, noting that FINRA had been discussing a possible extension with the SEC. “That is intended to buy a little time in order to figure out how to do this in the longer term,” he said.

FINRA granted firms temporary relief to allow remote inspections for calendar years 2020 and 2021 last November. “The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic,” FINRA noted in explaining why firms could complete remotely their inspection obligations under FINRA Rule 3110(c) (Internal Inspections) without an on-site visit to the office or location.

Firms have pushed for lasting changes to FINRA’s onsite branch inspection component. “Many broker-dealers believe they can maintain compliance remotely with the right technology and processes through a risk-based approach to branch supervision,” said Margie Webber director of regulatory compliance for RegEd. “They’ve been able to achieve branch supervision efficiencies through the use of technology during the pandemic by streamlining audit management, with the added bonus of eliminating travel risks and costs.” 

Pandemic shows that remote branch inspections can work.

SIFMA has urged FINRA to make permanent changes to branch inspections for broker-dealers.  “A remote inspection should be the default, and if firms determine that there are additional risks, only then should an on-site inspection be warranted. If significant concerns are discovered within a location that cannot be addressed in a virtual environment, an on-site inspection could be conducted,” SIFMA wrote in a February letter in response to a request for comment on lessons from the COVID-19 pandemic that FINRA issued in December. In its request, FINRA asked the industry for comment on the utility of current office definitions as well as the use and effectiveness of remote inspections.

“In order to implement risk-based inspection scheduling, we recommend that FINRA remove the annual requirement of FINRA Rule 3110.12 and the FINRA Rule 3110.13 presumption that such locations require inspection at least every three years in favor of a risk-based schedule,” SIFMA continued in its response.

“Risk factors weighed by firms, such as business conducted, access to firm books and records, heightened supervision of certain persons, and access to firm capital, could be documented. This process would allow for greater flexibility in handling supervision of lower risk areas of firm business without increasing risk of customer harm and would significantly lower costs on firms as more employees work more frequently from remote locations.”

Firms say the industry is prepared to conduct proper supervision virtually, noting as well that most broker/dealer functions can be performed remotely without on-site supervision and that many employees will not return full-time to a physical office, WealthManagement wrote in reporting that FINRA firms want inspectors to work remotely, permanently.

At FINRA’s annual conference in May, the regulator’s senior director of examinations, John Edmonds, and brokerage compliance officers agreed that remote examinations have been effective but challenging. As participants in a panel discussion, they noted challenges like tracking outside business activities and private securities transactions.

Technology improves remote supervision for broker-dealers.

“Firms need the proper technology to reduce risks associated with remote supervision,” said Webber from RegEd, whose conflict of interest suite includes solutions for tracking outside business activities, personal securities account management, and gifts, gratuities and political contributions.

RegEd assists broker-dealers in overcoming challenges associated with remote supervision through its Audit Management solution as well, which enables firms to implement an effective audit program per FINRA Rule 3110. Also, RegEd’s compliance questionnaires streamline the annual certification of the registered representative population in accordance with FINRA’s Supervision Rule.

During the COVID-19 pandemic, RegEd has helped firms review their branch exams with remote work and remote exams in mind, like with pre-audit questionnaires (PAQs) that streamline audit coordination and data input. “The PAQ is a perfect tool for compliance teams that want to cover the basics for a large volume of branch exams,” said Lindsay Restrepo, product manager for RegEd. “With auditors free to focus their on-site visits on higher-risk individuals and branches, the firm can prioritize travel based on federal and local health and safety guidelines. “

As built-for-purpose enterprise compliance solutions tailored to the needs of broker-dealers and investment advisers, RegEd’s compliance solutions for securities firms are highly effective as well as cost-efficient. Firms can seamlessly manage all aspects of their compliance programs, reducing risks and costs by automating and streamlining processes. And each solution is configured for optimal performance by RegEd’s implementation experts, who have worked with many of the nation’s largest securities firms.

Schedule a consultation to learn more about how RegEd’s enterprise compliance solutions improve efficiency, effectiveness, and transparency for broker-dealers.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

New State Insurance Regulations Surge as Regulators ‘Catch Up’ on Non-Pandemic Issues

State insurance regulations are changing faster than they did before the COVID-19 pandemic, though it may be hard to tell.

While a flood of pandemic-related state regulations (laws, administrative rules, bulletins and notices) pushed the numbers of insurance regulations to a record 3,600 in 2020, this year’s regulatory activity has proven to be just as busy as the previous record-breaking year, 2019. Many of this year’s insurance changes have been included in omnibus bills, some of which have reached an unprecedented 2,500 pages, rather than being introduced as stand-alone bills.

“This legislative season has been busy because last season got delayed. Regulators are playing catch up,” said Merlinda Johnson, Director of Insurance Regulatory Compliance for RegEd. “It’s not just straight insurance legislation either. States are putting insurance regulations into bills with a bunch of other changes to get everything passed.”

RegEd’s Regulatory Affairs team has vetted more than 40,000 pieces of legislation in 2021, looking for even the most subtle insurance-related changes. “It’s not uncommon to go through something in detail and find there’s nothing actionable for insurance companies,” Johnson said.

A 1,200-page bill may have one paragraph pertaining to insurance regulations, for example. Of the changes that RegEd regulatory analysts have found, many reflect the increasing complexity of state insurance regulations. Regulators are addressing issues like cybersecurity, diversity, equity and inclusion (DEI), artificial intelligence (AI), and environmental, social, governance (ESG) matters.

ESG issues are at the forefront, Deloitte found in surveying 100 chief financial officers and senior finance executives at US insurers in May. “The ‘E’ of ESG should be a particularly hot topic in the second half of 2021, with two-thirds of respondents taking additional steps to address and disclose climate risks, while about half are reconsidering their investment strategy and portfolio to better reflect climate risk concerns and goals. More carriers are also appointing chief sustainability officers or their equivalent to at least orchestrate ESG initiatives and reporting, while many are taking steps to reduce their own carbon footprint,” Deloitte wrote in its midyear 2021 US insurance outlook.

Though regulators will make fewer changes in the coming months as the state legislative season winds down, with most legislatures finishing business by the end of September, insurers will be busy identifying relevant changes that have been made and implementing the necessary responses.

RegEd’s Regulatory Affairs team has already notified clients if they have been affected by any of the 1,749 changes in state insurance regulations from the first half of 2021. Comprised of more than 30 regulatory experts with over 300 years of combined knowledge and experience in the insurance and/or securities industries, the team provides insurance companies with clear and concise regulatory summaries. Reportable events can then be curated within RegEd’s Regulatory Change Management solution and auto-assigned based on a firm’s specific requirements.

Regulatory Change Management helps firms manage regulatory change through the delivery of actionable content, in a closed-loop process, across the enterprise. This strengthens the firm’s compliance program, lowers compliance costs, and reduces non-compliance risk.

Schedule a consultation to learn how RegEd’s Regulatory Change Management solution helps compliance leaders:

  • Free resources to focus on high-value work;
  • Improve relationships with business units; and
  • Achieve peace of mind knowing that regulatory changes are handled.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

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